Before Selling Stock, Ask Yourself This Question

CHARLES ROTBLUT: What should be investors’ biggest concern for the second half of the year? The obvious answers are a worsening on the geopolitical outlook (e.g. Iran), higher-than-anticipated inflation, slower-than-expected economic growth or a pullback/correction in stock prices. These are identifiable risks. They are also known by every market strategist.

The less obvious, but bigger, risk is the likelihood of an investor acting in reaction to one of these events occurring. If you feel tempted to make changes to your portfolio (e.g., sell stocks) in anticipation of how you think these macro events will play out, stop and ask yourself what advantage you have over the professionals monitoring the same events.
More importantly, if you are tempted to sell stocks, ask yourself: How will you know when the optimal time to sell is and how you will know when the optimal time is to get back in will be?

There is a tremendous amount of research showing that individual investors in aggregate do a lousy job of jumping in and out of the markets. We think we know what is going to happen next and react accordingly, most often to our financial detriment. Yet short-term market movements don’t matter so long as you stay invested and follow an allocation strategy that is appropriate for your age and financial situation. Even if your timing is bad, as long as you stay invested, you will end up OK—and likely far better than if you try to anticipate what is going to happen next.

Charles Rotblut (@CharlesRAAII) is a vice president with the American Association of Individual Investors.